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  • Marta Beckwith

EU Proposal Part 5 (Final Post on the EU Proposal) - Determination of a FRAND License

Title VI of the Proposal establishes the Center as an avenue for making (potentially global) FRAND determinations. As the Proposal recognizes, we currently have at least two different jurisdictions (the U.K. and China), each of which claim to have the authority to set global FRAND rates and determine world-wide FRAND licenses.


You have to ask yourself, do we need yet another forum that purports to have the authority to set global FRAND rates. The answer is yes, maybe, in some circumstances. To start with, both the UK and China have failings (real or perceived) in their setting of FRAND royalties.


Companies have been hauled into the UK courts in recent years for a global determination of FRAND rates even though the UK is a small market with very little connection to any of the disputes. In each of the cases thus far, the UK: (a) is not the country of incorporation of the implementer’s parent company nor of the SEP holder; (b) is not the country in which either the implementer’s parent company nor the SEP holder has its headquarters; and (c) is not the biggest, or even a large, market for the standardized products. In each case, the SEP holder has been a non-practicing entity with no sales in the UK (or anywhere else) and the implementer has been a company headquartered in another country with comparatively small sales in the UK compared to its sales in other locations. In each case, the SEP holder’s portfolio contained only a handful of SEPs issued in the UK, but a large number of SEPs issued in other jurisdictions.


In these circumstances, its seems fundamentally unfair and a significant overreach for the UK courts to make global decisions that are primarily about non-UK companies, non-UK patents and non-UK sales. On the other hand, the Chinese courts are perceived to favor Chinese companies and the extent of political interference in the decision making process is opaque. Companies involved in Chinese proceedings fear favoritism in rate setting, and protectionism of Chinese based companies and other Chinese interests.


If the Proposal establishes a venue in which these failings are minimized without adding other significant failings then it could become a welcome addition. So, what needs to change in the Proposal to make that happen?


1. FRAND determinations should be local only. The Commission should not overreach. The Commission has jurisdiction over certain matters in Europe. Consequently, absent agreement of the parties, the Commission should clarify that the Center is limited to making determinations only for FRAND rates for patents registered or issued in member countries and only for sales in those countries. Parties could consent to having the decisions be global but, absent mutual consent, the Commission should restrict itself to Europe: there should not be any detrimental impact on either party if they do not agree to have the Center set a global FRAND license.


2. Decisions should be appealable. Arbitration is a voluntary act for a reason. In agreeing to arbitrate, a party agrees to give up certain legal rights. It is unfair to bludgeon parties into a procedure in which they (essentially involuntarily) give up significant legal rights. The Commission could remedy this issue by making the Center’s decisions appealable, perhaps in a new appeal procedure in the Unified Patent Court. Any decision that survives appeal could then become binding on the parties within the EU.


3. Decisions should be evidence based. The Proposal contains a section (Article 48) about evidence and provides that “at the request of a party or on its own motion, the conciliator may request the production of documents or other evidence.” This is a good first step but, maybe because I am American, I am of the opinion that the parties should be allowed to collect such evidence themselves as a matter of right rather than have to rely upon the conciliator to collect such evidence. The parties should be provided a reasonable (but not unlimited) opportunity to gather evidence through discovery, including through a limited number of depositions. While this might require extending the time frame for decision making by a few months to allow for such discovery, allowing the parties to collect a reasonable amount of discovery would make for a more level playing field and a fairer process.


Also, one of the best recent improvements in U.S. patent discovery jurisprudence has been the focus in some courts on requiring more fulsome Rule 26 initial disclosures in patent cases. In the courts that require fulsome disclosures up front, it has really helped the parties understand the case and address the issues early on. I would urge the Commission to require the parties to disclose up front, within one month of the institution of a proceeding for the requester and a month later for the respondent, at least the information discussed in this post: The Devil is in the Details: EU Proposal Part Three - Transparency (sepessentials.com).


4. Parties should have the option to have a three conciliator panel for FRAND determinations.


The Proposal seeks to have neutral conciliators. As my previous post discusses, that is not possible unless the parties disclose their related entities and those who have a financial interest in the outcome. Putting that issue aside, the Proposal also says that conciliators should have “extensive experience in dispute resolution and substantial understanding of the economics of licensing on FRAND terms and conditions.”


Although admirable, the combination of these two things is a tall order. The world of FRAND licensing is just not that large. It would be difficult to find individuals who are both entirely neutral and also have extensive experience with the economics of FRAND licensing. Most of us who have extensive experience in the area of SEP licensing have come to have opinions over the years about which side is more often right and/or which positions are correct. While many of us believe we could render neutral decisions in any given matter, I would hazard a guess that one side or the other would not consider most of us to be neutral.


One solution to that problem is to allow for a three conciliator panel like happens in many types of arbitration. The rules could allow the parties to decide whether to have either a single agreed conciliator or a three person panel of conciliators. If three conciliators, either the parties could agree on all three conciliators or, failing agreement, each party could appoint its own conciliator and the two conciliators would then decide on the third from a list provided by the Center or a list agreed by the parties. That would allow for both experience (the party conciliators) and neutrality (the Center conciliator) within a single panel.


5. Termination for Parallel Proceedings. It is entirely odd to allow termination of a FRAND determination upon the request of either party in the event of any parallel proceeding, whether initiated before or during the FRAND determination, as provided in Article 47. Large SEP licensing disputes inevitably have parallel proceedings in other jurisdictions on similar patents. This Article would allow one party, should it believe its case was going poorly, to terminate the Center’s FRAND determination more or less at will by making a request (if another proceeding was already pending) or to file a new proceeding somewhere else and then request to terminate the Center's FRAND determination. That seems like a waste of everyone’s time. I would urge the Commission to delete Article 47 from the Proposal or, at a minimum, clarify that termination is at the discretion of the conciliator (or panel of conciliators).


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